PCFRC Meeting Highlights June 27-28, 2011 Private Company Financial Reporting Committee 401 Merritt 7, PO Box 5116, Norwalk, Connecticut06856-5116 203-956-5218 e-mail: [email protected] Fax: 203-849-9714 JUDITH H. O’DELL Chair

Meeting Highlights June 27-28, 2011 ______Minneapolis, Minnesota

Private Company Financial Reporting Committee (“PCFRC” or “Committee”) members in attendance:  Judy O’Dell (Chair)  George Beckwith (June 27th only)  Steve Bodine  Mike Cain  Tom Groskopf  Maryann Lawrence  David Lomax  Steve Lords  Chris Rogers  Steve Shelton  Jim Smith

PCFRC members excused from meeting:  John Burzenski  James Stevenson

Financial Accounting Standards Board (“FASB”) Member: Larry Smith FASB Staff: Paul Glotzer. In addition, various staff members called into the meeting to discuss certain projects. American Institute of Certified Public Accountants (“AICPA”) Staff: Dan Noll, Bob Durak

Note that all discussions of FASB projects reflect the project’s status as of the date of this meeting. Check the FASB website for further updates.

FASB Member Update on Certain FASB Projects and Initiatives

Larry Smith updated the PCFRC on certain projects.  Balance Sheet – Offsetting. The FASB and the IASB recently discussed alternative approaches for requiring offsetting of financial assets and financial liabilities on the face of the balance sheet. For information about this project, see the Offsetting Project Update at FASB’s web site.  Reporting Discontinued Operations. This project has been placed on a slower pace for a variety of reasons, including the need for the FASB and IASB to focus on more imperative convergence projects. A proposed Accounting Standards Update (“ASU”) is expected to be issued in the fourth quarter of 2011. That 1/7 PCFRC Meeting Highlights June 27-28, 2011 proposed ASU may reduce the number of entities that fall within the scope of a revised definition of discontinued operations. In addition, the proposed ASU may include additional disclosures. For information about this project, see the project update at FASB’s web site.  Disclosure Framework. The FASB staff is working on a Discussion Paper related to this project. In doing so, they are developing a set of principles for determining which disclosures would be required for each entity, given that entity’s unique circumstances and the prevailing economic conditions. The objective of those principles would be to require each entity to disclose only the information that is relevant for its investors, lenders, and other creditors. Also, the FASB staff is exchanging ideas with the European Financial Reporting Advisory Group about a set of disclosure principles.

In addition, Larry informed the PCFRC that the FASB will be holding roundtables in the fall to focus on some private company issues, including possible improvements to the FASB Accounting Standards Codification®. The Roundtables will be held on October 11th in Chicago and October 17th in Norwalk.

Consolidation: Policies and Procedures

FASB staff updated the PCFRC on the Consolidation: Policies and Procedures project, including aspects of distinguishing an agent from a principal, how kick-out rights and participating rights affect the consolidation analysis, and the impact of economic factors such as fees and exposure to negative returns.

PCFRC members emphasized the need for consolidation examples and implementation guidance relevant to private companies, especially where related parties are involved. Also, the PCFRC stressed the importance of FASB coordinating the consolidation and leasing projects.

A proposed ASU is expected to be issued for exposure by the end of July. For information about this project, see the FASB web site.

Consolidation: Investment Companies

The FASB staff informed the PCFRC about recent developments with the Consolidation: Investment Companies project. The FASB and IASB tentatively decided on a definition of an investment company that encompasses six criteria. Also, the FASB tentatively decided that an investment company would be required to consolidate an investment property entity when it holds a controlling financial interest in the investment property entity. A proposed ASU is expected to be issued in the third quarter of 2011. This project is expected to have a much larger impact on those entities that follow International Financial Reporting Standards (“IFRS”), since investment-type companies abroad often follow local accounting standards. In the United States, certain industries may be affected. For example, real estate investment trusts may be included in the scope of the project. For more information about this project, see the FASB web site.

Investment Properties 2/7 PCFRC Meeting Highlights June 27-28, 2011

FASB staff provided a presentation to the PCFRC about the Investment Properties project, including tentative decisions reached about the scope of the project, measurement, consolidation, presentation and disclosure. The PCFRC expressed concerns about ensuring that the scope of the project and the definition of an investment property entity do not unintentionally encompass entities that they believe should not be included in the scope and definition, such as entities created to benefit from low income housing tax credits. FASB staff will address the PCFRC’s concerns and circulate a draft of a proposed ASU to the PCFRC for review before it is issued for exposure. The proposed ASU is expected to be issued during the third quarter of 2011. For information about the project, see the FASB web site at.

Disclosures about an Employer’s Participation in a Multiemployer Plan

FASB staff updated the PCFRC on the Disclosures about an Employer’s Participation in a Multiemployer Plan project. The FASB has been re-deliberating its earlier Exposure Draft and has reached tentative decisions which appear to alleviate the concerns the PCFRC had with this project, particularly the initial decisions about withdrawal liability disclosures. The FASB’s next step on this project is to conduct outreach about the auditability of certain aspects of the proposed requirements. For information about this project, see the FASB web site at.

Accounting for Financial Instruments

FASB staff informed the PCFRC about recent developments with this project.

The FASB decided that for nonpublic entities, a practicability exception to fair value measurement should be provided for investments in nonmarketable equity securities. The practicability exception would permit nonmarketable equity securities to be measured at cost less any impairment plus upward adjustments in fair value being recognized if information about a change in price is observable.

Further, the FASB tentatively decided that a nonpublic entity should use observable price changes in orderly transactions for the identical or similar financial asset with the same issuer to be used as an input for adjusting the carrying value of a nonmarketable equity security. When information about a change in price is observable, a nonpublic entity would be required to adjust the carrying value of a nonmarketable equity security upward or downward.

The FASB also discussed the impairment model for a nonmarketable equity security accounted for under the practicability exception. The FASB tentatively decided that an entity would apply a single-step approach in which an entity assesses qualitative factors (that is, impairment indicators) to determine whether it is more likely than not the fair value of a nonmarketable equity security is less than its carrying amount (that is, an impairment exists). If an impairment exists, an impairment loss would be recognized in earnings equal to the entire difference between the investment’s carrying value and its fair value.

3/7 PCFRC Meeting Highlights June 27-28, 2011

The FASB staff is also undertaking outreach with users to learn their views about the types of entities that should be required to provide expanded disclosures about liquidity and interest rate risks, for discussion at a future FASB meeting.

For more information about this project see the project update on the FASB web site.

Revenue Recognition

The PCFRC received an update from FASB staff on this project. The FASB and IASB decided to re-expose a proposed ASU during the third quarter of 2011, with a 120-day comment period.

After hearing about proposed disclosure differences for nonpublic entities, some PCFRC members asked about the definition of nonpublic entities in the proposed ASU and suggested that the definition not include conduit debt obligors.

FASB staff indicated that they plan on developing different transition methods for nonpublic entities and present them to the FASB for deliberation. Two alternatives are being considered: 1. Limited retrospective application. In the first set of financial statements following the effective date, an entity would apply the new standard to both of the following: (a) All contracts existing at the beginning of the current period; and

(b) All contracts entered into after the beginning of that period.

Under this approach, comparative amounts would not be restated. The cumulative effect of applying the new standard would be recognized as an adjustment to the opening balance of retained earnings for the current period.

2. Prospective application. Apply the new standard to all new (or substantively modified) contracts entered into on or after the effective date of the proposed standard. A nonpublic entity would continue to apply existing guidance to all contracts existing at the effective date.

PCFRC members provided feedback to FASB staff on the two alternatives. PCFRC members believe that revenue recognition will be difficult to implement because private companies have varying contracts that need to be analyzed. In addition, many contracts are written based on the accounting that will occur. Accordingly, a prospective approach makes sense. However PCFRC users indicated they would prefer a minimum of two years of comparative data. Therefore, a retrospective approach to the earliest year presented for revenue recognition may be the best solution, but only if the transition time for private company adoption is very lengthy (for example a 2014 date that would allow 2013 to be run parallel.) This is assuming a public company effective date of 2012.

4/7 PCFRC Meeting Highlights June 27-28, 2011 For more information on the Revenue Recognition project see the update on the FASB web site.

Leases

FASB staff provided an update to the PCFRC about the Leases project.

FASB staff suggested that August may be the best time to ask the FASB to consider private company issues related to the Leases project. Such issues could include practicality exceptions for short-term leases, related party leases, unwritten leases, month-to-month leases, simplifying the discount rate, and disclosures.

FASB staff asked for feedback on alternative private company accounting for leases with terms between 12-36 months. Some PCFRC members responded that such leases should be recorded on the balance sheet but undiscounted, to reduce complexity and cost. Other PCFRC members would prefer that such short-term leases were not recorded on the balance sheet, but if they were, the undiscounted approach would be best.

FASB staff also discussed lease disclosures and asked the PCFRC about their preferences for disclosing prior-year lease expense and future short-term lease commitments. A number of PCFRC members preferred the disclosure of prior-year lease expense.

The PCFRC advised FASB staff that a proposed ASU on Leases needs to be re-exposed for public comment due to the many changes that have been made to the original proposed ASU. In addition, the PCFRC asked that a conference call with FASB staff be conducted to discuss the Leases project after the July 22 joint FASB-IASB meeting. For further information on the Lease project see the update on the FASB web site.

Disclosure Framework Input

The PCFRC discussed the idea of providing FASB staff with input about disclosures that private company financial statement users would benefit from and that are not currently required. User members of the PCFRC discussed possible options such as improving related party disclosures, loss contingency, pass through entity distributions for owner’s tax liabilities, fixed costs versus variable costs, and replacement requirements of fixed assets. The PCFRC decided to reconsider providing this input at a future date.

Private Company Accounting Initiatives

Certain members of the PCFRC who are part of the FASB’s Private Company Resource Group working on a differential framework for private companies informed the Committee of recent progress on that effort. The framework would act as a decision- making tool to consider appropriate modifications and exceptions to GAAP for private companies. The FASB staff recently completed an initial assessment of the differences in the way that private company financial statements are used by lenders, investors and others. In its initial assessment, the FASB staff identified six significant factors that differentiate the financial reporting considerations of private companies from public companies. They are: 5/7 PCFRC Meeting Highlights June 27-28, 2011  Types of users  Access to management  Investment strategies  Ownership structures  Accounting resources  Education

The FASB staff will continue to work with the Private Company Resource Group in developing a differential framework for the FASB’s consideration. As part of its due process, the FASB will expose for public comment a draft of the proposed differential framework to solicit input from all interested parties.

The PCFRC discussed the need for private company constituents to be aware of and participate in the development of the differential framework. To that end, certain PCFRC user members suggested adding the topic to webinars being conducted in their professions to help educate private company financial statement users about this initiative.

Goodwill Impairment Testing

The PCFRC discussed the status of the FASB’s proposed ASU, Testing Goodwill for Impairment with FASB staff. The FASB was considering comments received from the public and would redeliberate its decisions. FASB staff indicated that the proposed ASU received support in the comment letters and no major changes to the proposed ASU are being contemplated. The PCFRC reiterated its support for the proposed ASU and its hopes that it will be finalized shortly.

Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers

The PCFRC discussed the Securities and Exchange Commission’s (“SEC”) work plan for incorporating IFRS into the financial reporting system for U.S. public companies and the possible impact it may have on private company accounting. The SEC’s work plan is described on the SEC web site.. The PCFRC will continue to monitor the SEC’s and FASB’s progress on this topic.

Update on Work of the IFRS for SMEs Implementation Group

Maintaining its interest in IFRS for SMEs, the PCFRC received an update from Tom Groskopf about the activities of the IFRS for SMEs Implementation Group, of which Tom is a member. The IFRS for SMEs Implementation Group receives unsolicited inquiries from around the world on the application of IFRS for SMEs. In response, the Group develops Question & Answer guidance.

The Group recently issued Q&As addressing the use of IFRS for SMEs in a parent’s separate financial statements. That Q&A is available at the IFRS web site.

Improving the format and content of ASUs 6/7 PCFRC Meeting Highlights June 27-28, 2011

The PCFRC provided suggestions to Larry Smith and the FASB staff about ways to improve the format and content of ASUs. In particular, PCFRC user members suggested that ASUs should present the “business case” for the standard. In other words, an ASU should explain what is the perceived financial reporting problem, how is the standard intended to fix that problem, and how will financial reporting be different from past practices due to the new standard.

Also, PCFRC members asked that the FASB consider improving the FASB Accounting Standards Codification® by clarifying when “pending content” becomes effective.

Post-implementation Review Process on FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”)

The PCFRC considered the post-implementation review questionnaires on FIN 48, which were developed by the Financial Accounting Foundation (“FAF”) to test pilot its process for conducting post-implementation reviews of standards issued by the FASB. Subsequent to this meeting, the PCFRC issued a letter to the FAF on this topic. The letter is available on the PCFRC web site at http://www.pcfr.org/downloads/PCFRC__final_letter_on_post_implementation_review_ FIN_48.pdf.

Next PCFRC Meetings

The Committee has set the following tentative meeting dates for 2011:  September 22-23 (Las Vegas, NV)  November 17-18 (Norwalk, CT)

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